On May 6, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Luxembourg.1
Luxembourg’s various competitive advantages of fiscal stability, a qualified workforce, prudent financial oversight, and business friendly regulations, have delivered strong growth and an expanding financial sector intermediating ever increasing flows. Economic growth reached 4.8 percent in 2015, well above the EU average, and was driven by net exports of financial services also benefiting from the world’s major central banks’ quantitative easing. Growth is projected at 3.5 percent this year, with continued strong job creation and subdued inflation.
In 2015, buoyant tax revenues due to higher-than-expected economic activity contributed to a fiscal surplus of 1 percent of GDP. The tax reform proposal tabled in 2016 contains a significant reduction in personal taxation and also in corporate income taxes starting in 2017. The measures are expected to result in a broadly balanced fiscal position over the medium-term.
Growth prospects are subject to downside risks, including from weakening international activity. Financial market stress could affect Luxembourg’s performance. Implementation of the international tax transparency agenda, which Luxembourg has embraced, could weigh on economic activity and tax revenue.
Executive Board Assessment2
Executive Directors commended the authorities for their prudent policies and sound institutions, which have underpinned the country’s continued strong macroeconomic performance. Directors considered that growth prospects remain strong, although are subject to downside risks related to clouded global prospects, potential market volatility, and changing international tax rules. Against this backdrop, continued strong efforts are needed to tackle key challenges related to the oversight of the financial system, adapt the tax regime to the changing international environment, and implement structural reforms to diversify the economy and boost competitiveness.
Directors encouraged the authorities to further strengthen oversight of the financial system and to maximize the benefits from the Banking Union. They welcomed the authorities’ commitment to continue to advocate for better oversight at the European level of nonbank holding companies that include banks and aim to improve risk monitoring. Given rising global risks, Directors stressed the importance of continued strong oversight of investment funds, and recommended that linkages between investment funds and banks be closely analyzed and monitored, including at the European level. Directors advised continued close monitoring of risks in the real estate market. They also encouraged an increase in the capital of the central bank to bolster its financial buffer.
Directors praised the authorities’ ongoing commitment to prudent fiscal policies. They endorsed the targeting of a broadly balanced fiscal position and of low public debt over the medium term. Directors recommended deeper pension reforms to ensure the long term viability of the system. Directors welcomed the authorities’ proactive engagement with the European and global tax transparency initiatives, and highlighted that the ongoing tax reform is an opportunity to broaden the corporate tax base and close loopholes contributing to tax avoidance. Directors considered that contingency measures should be put in place to address any revenue risks that may arise from weakening international activity, implementation of the international tax transparency agenda, and stress in financial markets.
Directors welcomed the authorities’ efforts to diversify and expand activity beyond the financial sector to enhance the resilience of the economy. They concurred that additional measures are needed to reduce inactivity traps, ensure wages’ alignment with productivity, and ease supply side constraints in the real estate market.
Directors praised the authorities for their policies to cope with elevated refugee inflows, and welcomed their integration strategy.
|Real economy||(Change in percent unless otherwise indicated)|
|Unemployment (percent of the labor force)||5.7||6.1||6.9||7.1||6.9||6.4|
|Resident employment (thousands)||223.9||229.3||233.4||238.4||242.8||247.8|
|Total employment (thousands)||370.1||379.0||385.5||395.6||405.7||416.0|
|CPI (harmonized), p.a.||3.7||2.9||1.7||0.7||0.1||0.5|
|Public finances||(Percent||of GDP)|
|General government revenues||43.8||44.7||44.0||43.8||42.9||42.8|
|General government expenditures||43.3||44.6||43.3||42.4||41.9||41.8|
|General government balance||0.5||0.2||0.7||1.4||1.0||0.9|
|General government gross debt||19.1||22.0||23.3||22.9||21.6||22.6|
|Balance of payments|
|Current account balance||6.2||6.1||5.7||5.5||5.5||5.4|
|Balance of trade in goods and services||27.6||31.1||32.9||34.0||35.5||36.0|
|Factor income balance||−21.6||−24.5||−28.0||−29.3||−30.6||−31.2|
|Exchange rates||Member of the euro area|
|U.S. dollar per euro||1.4||1.3||1.3||1.3||1.1||…|
|Nominal effective rate (2010=100)||100.5||98.1||100.2||100.5||97.0||…|
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.